PAS 12 INCOME TAXES 1. NATURE PAS 12 prescribes the accounting for the income tax The varying treatments of economic activities between the PFRSs and tax laws result to permanent and temporary differences. Permanent differences are those that do not have future tax consequences. Temporary differences are either taxable temporary differences or deductible temporary differences. Taxable temporary differences arise, for example, when financial income is greater than taxable income or the carrying amount of an asset is greater than its tax base Deductible temporary differences arise in case of the opposites of the foregoing. Taxable temporary differences result to deferred tax liabilities while deductible temporary differences result to deferred tax assets. If the increase in deferred tax liability exceeds the increase in deferred tax assets, difference is deferred tax expense. If it is the opposite, the difference is deferred tax income or benefit. Income tax expense (benefit) is computed using PFRSs. It comprises current tax expense and deferred tax expense (income or benefit). Current tax expense is computed using tax laws. he RECOGNITION And entity shall, with certain limited exceptions, recognize a deferred tax liability (asset) whenever recovery or settlement of the carrying amount of an asset or liability would make future tax payments larger (smaller) than they would be if such recovery or settlement were to have no tax consequences. * Deferred tax liability is recognized for all taxable temporary differences, except those that arise from the following: © Initial recognition of goodwill 0 Initial recognition of an asset or liability in a transaction which is not a business combination and, at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss) o Investment in subsidiaries, branches, and associates, and interests in joint arrangements to the extent that the entity is able to control the timing ofthe reversal of the differences and it is probable that the reversal will not occur in the foreseeable future. * Deferred tax asset is recognized for allp deductible temporary differences, including unused tax losses and unused tax credits, to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilized, unless the deferred tax asset arises from the initial recognition of an asset or liability in transaction that is not a business combination and, at the time of the transaction affects either accounting profit nor taxable profit (tax loss). in. MEASUREMENT Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period of their reversal, based on tax rates that have been substantively enacted by the end of the reporting period PAS 12 prohibits the discounting of deferred tax assets and liabilities. Iv. TRANSACTION Permanent Differences a. Interest income on government bonds and treasury bills b. Interest income on bank deposits c. Dividend income d. Fines, surcharges, and penalties arising from violation of the law e. Life insurance premium on employees where the entity is the irrevocable beneficiary. Taxable Temporary Differences a. Revenue is recognized in full under financial reporting but is taxable only when collected b. Aprepayment is capitalized and amortized to expense under financial reporting but is tax deductible in full upon payment. c. An asset is revalued upward and no equivalent adjustment is made for tax purposes. d. Depreciation recognized under financial reporting is lower than the depreciation recognized for taxation purposes. Deductible temporary differences a. Rent received in advance is treated as unearned income (liability) under financial reporting but is taxable in full upon receipt of cash.Vv. a. Bad debts expense is recognized for financial reporting when the collectability of accounts receivable becomes doubtful while it is tax deductible only when the accounts receivable is deemed worthless. Warranty obligation is recognized as expense when a product is sold under financial reporting but is tax deductible only when actually paid. Depreciation recognized under financial reporting is higher than the depreciation recognized for taxation purposes. Losses and tax credits that can be carried forward and deducted from future taxable profits. PRESENTATION Presentation in the Statement of Financial Position Deferred tax assets and deferred tax liabilities are presented separately as noncurrent assets and noncurrent liabilities, respectively. b. Presentation in Statement of Comprehensive Income Tax consequences are accounted for in the same way as related transactions or events. Current and deferred taxes are usually recognized in profit or loss.PAS 16 Property, Plant and Equipment Conceptual Framework and Accounting Standards What is a PPE? Property, Plant and equipment are “tangible assets that are held for use in production or supply of goods or services, for rental to others, or for administrative purposes, and are expected to be used during more than one period” Characteristics of PPE a) Tangible assets b) Used in normal operations c) Long-term in nature Examples of items of PPE a) Land used in business b) Land held for future plant site ©) Building used in business 4) Equipment used in the production of goods ©) Equipment held for environmental and safety reasons f) Equipment held for rentals g) Major spare parts and long-lived stand-by equipment h) Furniture and fixture i) Bearer plants Recognition The cost of an item of property, plant and equipment shall be recognized as an asset only if a) it is probable that future economic benefits associated with the item will flow to the entity: and b) the cost of the item can be measured reliably. Spare parts and servicing equipment Most spare parts and servicing equipment are usually carried as INVENTORY and recognized as an expense when consumed,However, major spare parts and stand-by equipment qualify as property, plant and equipment when the entity expects to use them during more than a period Spare parts and servicing equipment that can be used only in connection with an item of property, plant and equipment are accounted for as property, plant and equipment. Safety and Environmental Equipment Property, plant and Equipment may be acquired for safety or environmental reasons. They may be recognized as PPE because although they do not directly increase the future economic benefits of other existing assets, they are necessary in obtaining the future economic benefits from other assets. Initial measurement An item of PPE is initially measured at its cost. Elements of Cost 1. Purchase price, including non-refundable purchase taxes, after deducting trade discounts, and rebates. 2. Costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by the management. 3. Present value of decommissioning and restoration costs to the extent that they are recognized as obligation Examples of directly attributable costs Costs of employee benefits arising directly from the construction or acquisition of PPE; Costs of site preparation; Initial delivery and handling costs (c.g., freight costs); Installation and assembly costs; Testing costs, net of disposal proceeds of samples generated during testing; and © Professional fees. Measurement of Cost The cost of an item of PPE is the cash price equivalent at the recognition date. If payment is deferred beyond normal credit terms, the difference between the cash price equivalent and the total payment is recognized as interest over the period of credit unless such interest is capitalized in accordance with PAS 23 Borrowing Costs.Acquisition through exchange If the exchange has commercial substance, the asset received from the exchange is measured using the following order of priority: a) Fair value of asset Given up b) Fair value of asset Received c) Carrying amount of asset Given up If the exchange lacks commercial substance, the asset received from the exchange is measured at (c) above. Cessation of capitalizing costs to PPE Recognition of costs in the carrying amount of an item of PPE ceases when the item is in the location and condition necessary for it to be capable of operating in the manner intended by management. Subsequent Costs of PPE © Additions (capitalized) Improvement or Betterments (capitalized) © Replacements (capitalized or outright expensed) © Repairs (expensed outright: if extra-ordinary, capitalized) © Rearrangement Cost (expensed outright) Subsequent measurement Subsequent to initial recognition, an entity shall choose either: a) the cost model or b) the revaluation model accounting policy and shall apply that policy to an entire class of PPE. Cost Model After recognition, an item of PPE is measured at its cost less any accumulated depreciation and any accumulated impairment losses.Depreciation Depreciation is the systematic allocation of the depreciable amount of an asset over its estimated useful life. When computing for depreciation, each part of an item of PPE with a cost that is significant in relation to the total cost of the item shall be depreciated separately. Important Concepts «Depreciation © Depreciable Amount «Residual Value « Useful Life © Carrying Amount (Book Value) Note: Depreciation starts when the asset is available for use, in the manner intended by the management. Depreciation stops when the asset is; a) Derecognized b) Held for sale (PFRS 5) c) Fully Depreciated Selection of depreciation method There are various methods of depreciation, The entity shall select the method that most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. However, a depreciation method that is based on revenue that is generated by an activity that includes the use of an asset is not appropriate. Common Depreciation Methods © Straight Line Method * Unit of Production Method « Sum of Years Digit Method « Double Declining MethodThe Straight-line method of Depreciation Straight line method — depreciation is recognized evenly over the life of the asset by dividing the depreciable amount by the estimated useful life Depreciation = (Historical cost — Residual value) + Estimated useful life Changes in depreciation method, useful life, and residual value A change in depreciation method, useful life, or residual value is a change in accounting estimate accounted for prospectively. Prospective accounting means the change affects only the current period and/or future periods. The change does not affect past periods. Revaluation Model After recognition as an asset, an item of PPE whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluation surplus Fair value xx Less: Carrying amount (xx) Revaluation surplus — gross of tax xx *The fair value is determined using an appropriate valuation technique, taking into account the principles set forth under PFRS 13. Frequency of revaluation For items with significant and volatile changes in fair value, annual revaluation is necessary. For items with insignificant changes in fair value, revaluation may be made every 3 or 5 years. Revaluation applied to all assets in a class If an item of PPE is revalued, the entire class of PPE to which that asset belongs shall be revalued.The items within a class of PPE are revalued simultaneously to avoid selective revaluation of assets and the reporting of amounts in the financial statements that are a mixture of costs and values as at different dates. Subsequent accounting for revaluation surplus Revaluation is initially recognized in other comprehensive income unless the revaluation represents impairment loss or reversal of impairment loss, in which case it is recognized in profit or loss. Subsequently, the revaluation surplus is accounted for as follows: 1. If the revalued asset is non-depreciable, the revaluation surplus accumulated in equity is transferred directly to retained earnings when the asset is derecognized. 2. If the revalued asset is depreciable, a portion of the revaluation surplus may be transferred periodically to retained earnings as the asset is being used. Derecognition The carrying amount of an item or PPE shall be derecognized: a) on disposal; or b) when no future economic benefits are expected from its use or disposal